Structural Uncertainty and Optimal Pollution Control

We relax the economic literature’s usual assumption that the structural relationship between emissions and ambient levels of pollution is known with certainty. We find that uncertainty over this relationship can manifest as a unique form of multiplicative uncertainty in the marginal damages from emissions. We show how the optimal stringency of environmental regulation depends on this structural uncertainty. We also show how new information, like the discovery of previously unapportioned emission sources, can counterintuitively lead to increases in both optimal emissions and ambient pollution levels.